Hotel owners seeking to renovate instead of build are investing capital expenditure dollars into common areas like lobbies, fitness centers and breakfast spaces.
REPORT FROM THE U.S.—Hotels across multiple chain scales are seeing upgrades that reflect a widespread shift away from guestrooms in favor of enhanced common areas, expanded food and beverage and faster Wi-Fi. Experts say these trends are partially brand-driven, but are also reflective of the ever-changing preferences of the traveling public.
Motivated in part by the notion that guests—especially millennial-minded ones—are looking to spend less time in their guestroom and more time in hotel communal areas, hoteliers are increasingly working to not only provide those spaces, but also profit from them. Thus, hotels are diverting increasing amounts of their capital-expenditure budget toward upgrades—including some mandated by franchise property-improvement plans—that mirror these latest trends.
In the past year, construction owner advocacy, project management and cost-consulting firm MGAC has seen improvements being made within hotel public spaces, such as lobby, lounge and restaurant areas, according to Dermot Ryan, managing director at the firm. He said he’s also noticed a change in how hotels are handling F&B operations.
“The push now is to make it a communal space,” he said. “Make the public areas places where people want to go and hang out and ultimately spend money in, as opposed to what it was years ago, when people met at the bar, had one drink and then went out for dinner. There’s a huge emphasis on repurposing those spaces.”
The usual suspects
Experts told Hotel News Now that the most common renovation improvements at hotels are happening in places that have been long overlooked and perhaps taken for granted. Those areas include hotel fitness centers and lobbies, but also F&B outlets, especially breakfast areas.
Fitness center upgrades, while not necessarily extensive, are focused on expanding the space devoted on average to these facilities. Instead of utilizing the space of one guestroom for the fitness area, some hoteliers are choosing to at least double that space, while also adding more workout and audio/visual equipment.
Bjorn Hanson, clinical professor at the New York University Preston Robert Tisch Center for Hospitality and Tourism, said owners often convert two guestrooms into a fitness center or add an extension on to the building to make room for more elaborate fitness rooms.
“Often hotels will add a large-screen TV if there wasn’t one before, or multiple large-screen TVs, so they can have news or other programming on, but (TVs) can also be used for individuals to watch fitness-related videos,” he said.
That same philosophy extends to dining areas, which are not just seeing expansion in the full-service and luxury sectors, but also in select-service hotels. For many properties, the idea is to create a space that is functional and updated as a breakfast area, but can also transition into a revenue-generating outlet for lunch and dinner. This concept places greater emphasis on designers, who must brainstorm a plan to execute on this multifaceted goal.
“The days of having the dark bar/restaurant off in the corner, with a set of doors to go through, and guests sitting there watching one TV on the wall, are gone,” Ryan said. “That’s where you’re bringing the entire public space into play, so the bar in the morning is your coffee and service area, and at night it’s a full-service bar and restaurant. It’s activated 24/7; that’s the concept.”
At full-service and luxury properties, the F&B trends continue to emphasize the creation of signature, unique dining experiences that go beyond standard hotel fare. Some new F&B outlets partner with celebrity chefs to further drive excitement, attracting both guests and others from the surrounding community.
Bringing in great dining services and experiences is equally important, said Winston Kong, partner at Champalimaud Design.
“Chefs are like rock stars these days. It’s a big part of travel, and by having better restaurant and dining experiences, the local neighborhood then goes there sometimes, too,” he said. “There are some properties here in New York that attract a local crowd, and that really helps in the down time, when the hotel isn’t fully occupied. It becomes a great neighborhood spot.”
The ongoing F&B revitalization even extends to basic amenities like coffee and snacks. In the past, in-room coffee makers and minibars were standard equipment; but now, with minibar profits disappearing and consumers spending on specialty coffee drinks, designers are looking to move these elements out of the guestroom and into public areas.
“We’ve seen a big debate about coffee recently, and also the minibar comes up almost every time we do a hotel,” Kong said. “The minibar’s very expensive, and what I’ve seen people do is offer the snacks and sundries down in the lobby. So if you do want snacks, they would be more reasonably priced, because the cost for the operator to run one store downstairs, versus having housekeeping continually fill up the minibar, is different.
“For coffee, some hotels are creating a grab-and-go situation, adjacent to something used to clean the equipment, like a dishwasher,” he added. “I would much rather use that than a coffee maker in the room, because I’m concerned about how it’s being cleaned.”
A never-ending quest
Another common hotel renovation expenditure is for the installation and/or upgrading of high-speed internet and Wi-Fi infrastructure, which continues to be a moving target for hoteliers. In our present mobile culture, the need for bandwidth seems ever-increasing, and making sure guests are happy with a hotel’s connectivity is no small feat. So for now, the enhancements keep coming, even though the service is difficult for owners to monetize.
While this trend continues to be seen in hotels, Hanson said “it’s not a very popular improvement with many owners.”
“For loyalty program members, maybe there are other tiers, as well as larger bandwidth levels being offered, so a family with three children downloading movies is going to end up paying a premium,” he said. “What’s happening is owners are receiving less revenue, but being asked to fund more, and a typical budget for upgrading high-speed internet access is not inexpensive: $50,000 to $100,000 a year being the most common numbers.”
Fortunately, most owners are funding these renovations and more with their planned reserve for replacement budget, which usually runs in the range of 3.5% to 4% of revenue. For more extensive overhauls, owners may chip in additional capital, either from reserves or renovation loans. Like death and taxes, hotel renovations are an inevitability, and owners are prepared for the expense.
Stephen Siegel, principal at H-CPM, a hotel construction project manager and owner representation firm, said owners for the most part are using their own capital to complete renovations.
“On the renovations where they’re buying an asset and there’s a lender involved and you have to do those capital improvements as part of the change-of-ownership PIP, usually the lenders bake that into the cost of their asset and they just pay it down,” he said. “Once they close on a property, there are still funds available to be dispersed once work gets underway.”
The good news, for some, is that the new federal tax bill is making renovation expenditures a little easier for owners to swallow. The current legislation allows hoteliers to write off certain renovation expenses all at once, rather than depreciating them over time. Among other benefits, this change may prompt some owners—who had planned to conduct renovations in phases—to perform the renovation all at once instead. Simply stated, experts believe it’s a great time for hoteliers to tackle that looming refurbishment.
“The very nature of hotel CapEx has special advantages under the new tax law,” Hanson said. “Those advantages right now are worth much more than any offset you may have seen in the past from the cost of solar panels, or some of the other items where there may be tariffs now. For right now, the tax laws have an advantage for CapEx, and it’s hard to find any disadvantage.”